Curwin v. R., [1998] 3 CTC 2305

Garon T.C.J.:

These are appeals from income tax reassessments for the 1992, 1993 and 1994 taxation years. By his reassessments, the Minister of National Revenue disallowed the deduction claimed by the Appellant of rental losses in the amounts of $2,696, $5,104, and $11,905 for the 1992, 1993 and 1994 taxation years respectively.

In assessing the Appellant for the three years at issue, the Minister of National Revenue relied on the assumptions of fact set out in paragraph 4 of the Reply to the Notice of Appeal. Paragraph 4 reads thus:

In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) in the 1992 taxation year, the Appellant resided at 32 Southview Crescent, North Bay, Ontario (the ‘Residence’);

(b) the Appellant’s son resided with the Appellant in the 1992 taxation year and compensated the Appellant in the amount of $4,800.00;

(c) in the 1993 and 1994 taxation years, the Appellant moved from North Bay, Ontario to the United States and then to British Columbia;

(d) the Appellant’s son continued to live in the Residence in the 1993 and 1994 taxation years and compensated the Appellant in the amounts of $9,600.00 and $2,000.00, respectively;

(e) in the 1992, 1993 and 1994 taxation years, Appellant reported the following rental income (losses) in filing his income tax returns for those years;

Taxation	Gross	Expenses	Net Income (Loss)
Year	Income
1992	$4,800.00	$ 7,496.00	($ 2,696.00)
1993	$9,600.00	$14,704.00	($ 5,104.00)
1994	$2,000.00	$13,905.00	($11,905.00)

(f) the Appellant did not have a reasonable expectation of profit from the Residence during the 1992, 1993 and 1994 taxation years;

(g) at all material times, the Appellant was not dealing at arm’s length with the Appellant’s son;

(h) the expenses claimed were personal or living expenses of the Appellant and were not incurred for the purposes of gaining or producing income from a business or property.

The Appellant was the only one to testify.

The Appellant admitted the allegations of fact referred to in subparagraphs (a), (b), (c), (d), (e), and (g) of paragraph 4 of the Reply to the Notice of Appeal. He denied the allegations set out in subparagraphs (f) and (h) of paragraph 4 of the Reply to the Notice of Appeal.

The Appellant stated that he bought the subject house in 1989. He took out a five-year mortgage to finance the acquisition of this house. The rate of interest payable on the mortgage was at that time 11 /4 per cent. The mortgage was renewed in 1994 at a rate of interest of about seven per cent, the Appellant being unable to state precisely the then rate of interest. The house was sold in August 1996.

This house had been acquired to be used as a residence for the Appellant and his wife. In 1992, the Appellant was offered employment in British Columbia, which he accepted. Accordingly, the Appellant and his wife after living in U.S. for a few months moved to British Columbia. In 1992, the Appellant decided to rent the house. He rented half of the house in 1992 to his son, Mathew. In 1993 and 1994, the full house was rented to the same son.

The Appellant claimed that the rent charged to his son in 1992 and 1993 was reasonable and in line with market conditions. During the year 1994, the son was unemployed and the Appellant charged him the rent that the son could afford to pay. An attempt was also made in 1994 to find another person who could share in renting half of the house; these efforts were unsuccessful.

The Appellant decided not to rent the house in 1995 and in 1996. In this connection, the Appellant asserted that there were three reasons justifying his decision. One consideration was that his wife could use the house when visiting the family living in the area of North Bay. Another consideration related to the fact that there was a fair amount of uncertainty regarding his employment with the employer for whom he was working in British Columbia. The Appellant agreed that maintaining the ownership of the house was a “safety net” under the circumstances. The third consideration had to do with the point that he could decide to sell the house at an appropriate time, taking into account market conditions.

Also, it is to be noted that in the course of giving evidence, the Appellant indicated that he was prepared to accept the reassessment in respect of the 1994 taxation year.

Analysis

The question to be determined is whether the Appellant had a reasonable expectation of profit in the years 1992, 1993 and 1994 when he rented out the subject residence.

First, it was clearly established that the Appellant, at the outset, acquired the subject house as a personal residence. When the Appellant decided to rent a portion of the house in 1992, and the entire house in the years 1993 and 1994, he was influenced by personal considerations, quite apart from the making of a profit from the rental operation. These personal considerations had to do perhaps primarily with the uncertainty of his new job in British Columbia. This decision not to sell the house in 1992 or in subse- quent years, 1993 and 1994, made sense, having regard to the situation in which the Appellant found himself at that time.

Moreover, I am satisfied, on the evidence, that there was not any realistic hope that the Appellant could derive a profit from the rental of the house in the reasonably near future. The Appellant did not refer to any concrete plan that he might have had at the time according to which a profit could likely be made from the rental of the property in the not too distant future. In this connection he only said that he was hoping that interest rates on mortgages particularly would go down.

It was not even established that the likelihood of the Appellant making a profit in the near future from the rental of the subject property was a realistic one after the mortgage had been renewed in 1994 at a much lower rate of interest having regard to the economic conditions prevailing in North Bay at the time, as described by the Appellant.

Here, I am not confronted with a case where an operation turns out to be less profitable than anticipated because of an unexpected and unfavourable turn of events. The present case is, rather, one where the embarking on a rental operation of the subject property involved important considerations of a personal nature. The reasonable expectation of profit was not the dominant feature behind this rental operation.

The personal elements permeating the rental operation are particularly striking, when the Appellant leased the subject property for a very low rent in 1994 because his son, being unemployed, could not afford to pay a higher rent. This happened in the year of the renewal of the mortgage when the rate of interest payable in respect of the latter mortgage had declined substantially.

I also understand that the Appellant became indignant at the bureaucratic treatment that he had from the Revenue officials, and I do not have any reason to doubt his testimony in this regard. Notwithstanding this, the fact remains that the Appellant did not have a reasonable expectation of profit at the material times when he was engaged in this rental operation. He is not therefore entitled to the deduction of rental losses in the three years in issue.

For these reasons, the appeals from the income tax reassessments for the 1992, 1993 and 1994 taxation years are dismissed.

Appeal dismissed.